Ugly truths about income inequality in America, which no politician dares to say

Summary: A new books by journalists Barlett and Steele shows some ugly and seldom-mentioned aspects of the growing inequality in America. Most especially, the role of government policy. It didn’t just happen.

Investigative journalists Donald L. Barlett and James B. Steele are in Washington, D.C., today to talk about their new book, The Betrayal of the American Dream. I’ve read it, and if there’s one takeaway from I can share without spoiling it, it’s this: The roots of the current economic insecurity felt by millions of Americans go well beyond the issues and programs promoted by politicians of either party. And as we kick off the Republican Convention (which Sunlight Live will cover), the Democratic Convention (ditto) and launch into the fall campaign season, it’s unlikely that either candidate will address them.

Betrayal describes the impact of a series of policies adopted by Washington on middle class and working class Americans; the work focuses more on the stories of the victims than on those who made the policies. Some of their earlier works — America: What Went Wrong (published in the Philadelphia Inquirer, which distributed for free more than 225,000 reprints of the series; the book went on to be a best-seller), America: Who Really Pays the Taxes and America: Who Stole the Dream (full disclosure: I was fortunate enough to work as their researcher on that book), go into great depth about how special interests used lobbying, campaign contributions and the revolving door to get their way in Washington.

I thought of Barlett & Steele recently when historian Niall Ferguson touched off a firestorm by writing a Newsweek cover story called “Hit the Road, Barack” (alternative title suggestion: 2008 John McCain supporter prefers Romney over Obama). Ferguson wrote, as part of his brief against a second term for the incumbent:

“Welcome to Obama’s America: nearly half the population is not represented on a taxable return — almost exactly the same proportion that lives in a household where at least one member receives some type of government benefit. We are becoming the 50–50 nation — half of us paying the taxes, the other half receiving the benefits.”

In a rebuttal to Ferguson’s piece, Matthew O’Brien of the Atlantic responded:

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It is true that 46% of households did not pay federal income tax in 2011. It is not true that they pay no taxes. Federal income taxes account barely account for half of federal taxes, and much less of total taxes, if you count the state and local level. Many of those other taxes can be regressive. If you take all taxes into account, our system is barely progressive at all.

But why do almost half of all households pay no federal income tax? Because they don’t have much money to tax. Here’s the breakdown from the nonpartisan Tax Policy Center. Half of these households are simply too poor — they make under $20,000 — to have any liability. Another quarter are retirees on tax-exempt Social Security benefits. The remaining households have no liability because of tax expenditures like the earned-income tax credit or the child credit.

Left unsaid by either writer is what’s led to this state of affairs. Barlett and Steele point to multiple causes, starting with changes to the Internal Revenue Code stretching back decades that favored corporations and the wealthy. They also cite trade policies that led U.S. manufacturers to seek cheaper labor around the world (in some cases, the U.S. government supplied money and other incentives to foreign businesses to build industries that displaced U.S. workers), changes in the social contract that weakened or altogether eliminated benefits for workers, and deregulatory efforts that upended entire industries. These policies enacted without concern for their effects on the middle class, or were sold to Americans as policies that would make us all better off.

One catches glimpses from time to time suggesting all is not going as planned. Surveying an IRS report on the 400 income tax returns reporting the highest gross adjusted income, Forbes noted that this tiny fraction of taxpayers reported 16% of all capital gains. At the other extreme, Pew Research Center reported that median net worth–not income, but total assets amounted in a lifetime–plunged 28% for middle class households between 2001 and 2011. “Since 2000, the middle class has shrunk in size, fallen backward in income and wealth, and shed some — but by no means all — of its characteristic faith in the future,” the report stated.

These trends didn’t start in 2000, but long before, and Barlett and Steele have spent decades documenting them. In the first part of America: What Went Wrong, published more than 21 years ago, Barlett and Steele addressed the same tax numbers that Ferguson blames on Barack Obama’s America, and O’Brien offers as an unremarkable fact of life. In the midst of a 1,600-word passage in which they analyze tax statistics — yes, you read that right, 1,600 words in a newspaper article on tax statistics — they documented the exploding incomes of those at the top against the much more sluggish growth of incomes for those in the middle. They predicted:

Because of the dramatic increase in their numbers, the over-$500,000 group is accounting for a larger share of overall income tax collections at the same time their individual payments have fallen off sharply. In 1980, they paid $2.8 billion in taxes, or 10% of total individual income taxes. In 1989, they paid $59.4 billion, or 14% of the total. If this trend continues, those at the top will pay an ever-mounting share of the taxes. But that’s because everyone else will be falling further behind. Consequently, they will have less income to be taxed.

That’s precisely what’s happened. The top 1% of tax filers, with average income of about $960,000, paid a staggering 37% of federal income taxes. The bottom 50% of taxpayers paid just 2%.

In that same lengthy passage on tax statistics, Barlett & Steele noted the squeeze that middle class families faced:

In 1970, a Philadelphia family with income of $9,000 to $10,000 — median family income that year was $9,867 — paid a total of $1,689 in combined local, state and federal income and Social Security taxes. In 1989, a Philadelphia family with income of $30,000 to $40,000 — median family income that year was $34,213 — paid $8,491 in combined local, state and federal income and Social Security taxes.

Thus, while these taxes consumed 17.8% of a middle-class family’s earnings in 1970, by 1989 they took 24.3% of the family’s income. When real estate taxes, sales taxes, gasoline taxes and other excise taxes and local levies that have gone up are added in, the middle-class family’s overall tax burden rises to about one-third of family income.

As to those on the bottom:

Almost half of all Americans who had jobs and filed income tax returns in 1989 earned less than $20,000. Of the 95.9 million tax returns filed that year by people reporting income from a job, 47.2 million came from people in that income group. They represented 49% of all such tax filers. Between 1980 and 1989, the average wage earned by those in the under-$20,000 income category rose $123 — from $8,528 to $8,651. That was an increase of 1.4%.

Over the decade, the average salaries of people with incomes of more than $1 million rose $255,088 — from $515,499 to $770,587 — an increase of 49.5%. That, it should be stressed, was their increase in wages and salaries alone.

Here’s the most astonishing thing about that last passage. In 1989, 49% of Americans with income from wages and salaries reported income under $20,000. Thirty years later, that number looks slightly better: In 2009, according to statistics from the IRS, 45% of returns reported the same level of income (you can download the data by clicking here). But that doesn’t take into account the impact of inflation. So $20,000 in 2009 is worth only $11,560 in 1989 dollars. In other words, the filers of some 52 million tax returns and their dependents didn’t improve or stay even — they fell further behind, seeing their real earnings drop by 42%.

In all the speeches and punditry we’ll hear at the conventions, that fact is unlikely to be mentioned by either party.

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23 thoughts on “Ugly truths about income inequality in America, which no politician dares to say”

Imagine a lifeboat containing 300 million people. The only way to stay in the lifeboat is to throw someone else out. Trouble is, everyone else is trying to throw you out too.

Is this a recipe for a workable society?

The only way to make money in America today is to destroy someone else’s job. Either by automation, or by offshoring, or by outsourcing, or by otherwise disintermediating it. All the great companies in America today operate by destroying American jobs: amazon.com has gutted the mom-and-pop bookstores and is now trying to destroy the publishing industry by disintermediating publishers with its kindle book device and is also now trying to destroy all the mom-and-pop small hardware and consumer electronics stores with its new next-day shipping centers. Meanwhile, google with its self-driving car, is trying to destroy all the jobs of delivery drivers and taxi drivers and bus drivers. Every great company in America serves only one purpose: to destroy American jobs.

This is like Shumpeterian creative destruction, but with a twist: no creation, only destruction. As the middle class erodes like ice in the rain, we’re seeing the final collapse of America as the tax base collapses.

Tyler Durden has already noted in “The great stagnation” that innovation has collapsed. No surprise. When all the manufacturing and invention goes on overseas in companies that supply parasitic American corporations who do nothing but slap their brandname on the product, eventually the overseas suppliers become the ones who innovate new products and sell them directly to consumers worldwide, bypassing the American parasites. As the Forbes article “Why Amazon Can’t Make A Kindle In the USA” points out:

“ASUSTeK started out making the simple circuit boards within a Dell computer. Then ASUSTeK came to Dell with an interesting value proposition: “We’ve been doing a good job making these little boards. Why don’t you let us make the motherboard for you? Circuit manufacturing isn’t your core competence anyway and we could do it for 20% less.”

“Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. On successive occasions, ASUSTeK came back and took over the motherboard, the assembly of the computer, the management of the supply chain and the design of the computer. In each case Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. However, the next time ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost. As The Innovator’s Prescription concludes:

“Bingo. One company gone, another has taken its place. There’s no stupidity in the story. The managers in both companies did exactly what business school professors and the best management consultants would tell them to do—improve profitability by focus on on those activities that are profitable and by getting out of activities that are less profitable.“

“Imagine a lifeboat containing 300 million people. The only way to stay in the lifeboat is to throw someone else out. Trouble is, everyone else is trying to throw you out too. Is this a recipe for a workable society? The only way to make money in America today is to destroy someone else’s job.”

That’s such a disturbing image, I want to question it.

If the only way to make money is to destroy someone’s job, does it really prevent a workable society?

Thought #1: Why the emphasis on jobs and money? I can’t eat my job and I can’t even eat money. They’re just a way to organize to meet everyone’s needs and split up the resouces. There are other ways (socialism) which can be applied to varying degrees. Not nearly as good as a market system tuned for stability and national well-being. But if the market system is so severely out of tune, is it worth it?

Thought #2: Losing well-paying middle class jobs is perfectly natural, with so much cheap labor availible in the world. What’s un-natural is that the upper class corporate/management/financial sector jobs are still here. If they’re the ones steering the lifeboat it would suggest the working class and middle class are directly at odds with the corporate/management/financial class…

Thought #3: reject the premise. The jobs aren’t being destroyed, just moved overseas. So instead, lets ask whether, if we abandon free trade and have strong protectionism, can we have a workable society?

Thomas, this is a very interesting point about modern business in the US. It rings true that most of the big money these days comes from cutting costs (and therefore also jobs) rather than from openning new markets or innovating in big ways.
There is also a huge paper-pushing industry that makes money though leverage and by managing financial assets. Although debatable, I wouldn’t say that creates a lot of real value.

Still, I do believe that there are many areas where US industry does create real value for people here – construction for example.

Interesting to observe that the only way for the government to mainting its share of the national income with these large shifts between social groups is to either increase taxes on the groups with falling share of GDP and keeping tax income unchanged from the groups with rising income share. Or vice versa.

I have to disagree with Rune. There is a third way, and that is the way the US chose to go.

The group with the falling share of GDP (e.g. the bottom 80%) has increasingly fallen off the tax roles. The group with the rising share of the GDP has managed to cut their tax rates. So both groups are paying smaller percentages of their income in federal income taxes than they did 20+ years ago. This leads to ever-increasing deficit spending.

Of course it’s not sustainable in the long run, but it will work until something horrible happens or we change the paradigm.

” is to either increase taxes on the groups with falling share of GDP and keeping tax income unchanged from the groups with rising income share. Or vice versa. It seems that the former policy path has been choosen in the USA”

Pretty good article. It mentioned inflation, but I wish it had described it for what it really is; the most unfair form of hidden tax in our society. This tax punishes the saver, undermines the poor, and decimates those on fixed incomes. The rich barely feel its sting. Unfortunately, this does not get enough press nowadays.

How is inflation not fair? It’s not progressive and it taxes those who can amass cash proportionally more than those who cannot. If we want to discuss fairness, how is it fair that a CEO is taxed at 15% capital gains because he strategically arranged to be paid in stock options while laborers making a fraction of his income are taxed at 20%-30% because their compensation is called “employment income”.

Cardillo goes to the heart of a driver of inequality: the unequal treatment of income. Capital gains are taxed far more lightly than workers’ income, and the rich have greater access to vehicles for tax deferral and avoidance.

Good question, really.
1) Real (actual) inflation on goods outpaces COLA increases on fixed income.
2) Inflation taxes the small saver, limiting any real increase in wealth.
3) Those who can ‘amass’ cash, don’t. They have better vehicles to store their wealth.
Not to say your other points are not valid. I’m just saying that inflation is overlooked or ignored. Perhaps intentionally.

“2) Inflation taxes the small saver, limiting any real increase in wealth.”

“Limiting” is inaccurate. Slowing the rate of growth is correct for all times when the after-tax interest rate is greater than the inflation rate. Due to the Fed’s zero-interest-rate-policy (ie, near-zero), that’s not true at this time for many savings instruments (ie, money market funds, short-term CDs).

“I’m just saying that inflation is overlooked or ignored. Perhaps intentionally.”

I cannot imagine how anyone can support that statement. Inflation is running below the Fed’s 2% target, yet the financial news media and right-wing media are obsessed with the subject. There have been frequently forecasts (often hysterical) of inflation and hyperinflation since 2008. All wrong.

Inflation is not fair… neither is deflation. What are you gonna do? Life, very often, is not fair. But do you know would be worse? Stasis! Nothing ever changing… everything always the way it is just now. Yeah, if you’re in a good place right now, it would be good. Right now, most people aren’t in a good place. In fact, there has never been a time in history when it’s been good for everybody.

Stasis is very likely not even a possibility, buy let’s say it were. Who is gonna benefit from stasis, and who is gonna be screwed? You probably have great hopes for yourself. But who is gonna explain to the permanently screwed that they have to suffer eternally so that you never have to “suffer” inflation or deflation. What would you be willing to do to them to keep them down? How far would you go to make sure you never have to be inconvenienced? And would you be able to sleep at night? Cause it seems to me stasis would be tyranny.

And isn’t that just the problem we are dealing with in the world today? Investors, financiers, bankers and governments made really (ultimately) bad choices over the last 30 or 40 years. Rather then pay the piper and move on, they are doing everything they can to hold onto their wealth and their power, while the vast majority suffer.

Things will always change… At this point it is moot as to which would be worse between inflation or deflation. Either is preferable to the way things are just now. From the big bang to today to the last sunset, nothing is as it was or will be. And that’s a good thing, no matter how bad it may be today.

“But do you know would be worse? Stasis! ”
We don’t have stasis. Much is happening. Conditions are changing.

“At this point it is moot as to which would be worse between inflation or deflation.”
Read about the great depression to see what even a few years of light deflation does to a high-debt economy like ours.

“Either is preferable to the way things are just now.”

That’s too weird to comment on. First, we’re having very slight inflation (albeit below the Fed’s 2% target). Second, high rates of inflation or even slight deflation would be far worse than the current slow real growth.

“This tax punishes the saver, undermines the poor, and decimates those on fixed incomes.”
Yes. But the majority of Americans are net debtors. Hence the popularity of mild inflation, going back to the 19th century populists.

“The rich barely feel its sting.”
The rich tend to be creditors (the rich own most of the fixed income securities). Mild inflation hurts them, which is why they are strong foes of inflation — and advocates of hard money. Again, this battle has been repeatedly fought in America for the past 150 years.

“Unfortunately, this does not get enough press nowadays.”
Because your points are incorrect.

Frank: “But do you know [what] would be worse? Stasis!”
FM: “We don’t have stasis. Much is happening. Conditions are changing.”

Yeah… As I said “Stasis is very likely not even a possibility…”. Can’t rule it out. Feudalism was more or less static. Change was not absent, but came only sporadically. On a generational basis, it was more or less static. So technically possible….

Sure, what we have now is nothing like stasis. However, the powers that be are working desperately to working hard to create stasis… for themselves. Everyone else is getting royally screwed. They are working to hold the line when we need change. We need to move beyond Mises, Marx, Keynes, et al, but the neo-libs have a death grip that will not be loosed easily.

Our current situation is so different from the Great Depression that comparisons are not only pointless, but misleading. The GD took place place after a period of real growth, where as today many sectors (except finance and police/military) of our economy have been shrinking for decades. During the GD, we were sitting on vast quantities of cheap, readily available natural resources, where as today we are literally contemplating trying to squeeze oil from rocks. During the GD, people were out of work because factories were idled, where as today the factories are gone.

Jobs lost to off shoring, jobs lost to automation, jobs lost to mega-mergers and consolidation. In “The End of Work”, Rifken predicted just 2% of the worlds population would be required to produce all the goods needed by everyone. Apparently most of those jobs will be in China. So, while during the GD we could grease the wheels of consumption and grow ourselves out of it, today greasing the wheels of consumption will do more for the Chinese economy then ours.

Inflation is very low. The Dow is at record highs. Even GDP (http://www.youtube.com/watch?v=77IdKFqXbUY) is up. Personal income? Personal wealth? Employment? How are those numbers doing? Down, down and down. So yeah, if you’re outside of the Wall Street/ Washington bubble, it’s moot as to which would be worse between inflation or deflation. There are much bigger issues.

“However, the powers that be are working desperately to working hard to create stasis… for themselves. Everyone else is getting royally screwed. ”

Here we move into the realm of guesswork. My guess is that we have what is in effect an open-source movement (per John Robb), in which the 1% are seeking greater power and wealth — the very opposite of stasis. They’ve spent a generation preparing the ground; now they reap the harvest. Hence this is a period of rapid change due to positive feedback. The 1% gain power & wealth, which they use to gain still more power & wealth.

The GOP (ie, Romeny-Ryan) program is a pure expression of this. They 1% are taxed at far lower rates than us, and get greater benefits. And they want still lower taxes and to cut our benefits.

In a few years we might beg for stasis. Stop the train, we want to get off.

For Pulitzer Prize-winning journalist Hedrick Smith, the American Dream depends upon the prosperity of middle class. Ray Suarez talks to Smith about his latest book, “Who Stole the American Dream?” for more on what needs to change to restore the American Dream, economically, politically and culturally.

Excerpt from Transcript:

JUDY WOODRUFF: Now: the dismantling of middle-class power and prosperity. Ray Suarez has our book conversation.

RAY SUAREZ: One aspect of the current national campaigns addressed by both parties is how hard it has been in recent years to get ahead in America, even to stay in place, as economic turmoil destroyed working lives, cratered housing values, and undermined retirement accounts.

“No one should come to work and endure extreme temperatures, inhale dust and chemical residue, and lift thousands of boxes weighing up to 250lbs with no support. Workers never know how long the work day will be- sometimes its two hours, sometimes its 16 hours. Injuries are common, as is discrimination against women and illegal retaliation against workers who speak up for better treatment.”

Greece’s Eurozone creditors are demanding that the government in Athens introduce a six-day working week [with 13-hour workdays] as part of the stiff terms for the country’s second bailout. The demand is contained in a leaked letter of the ‘troika’ of the country’s lenders, the European Commission, the European Central Bank and International Monetary Fund. From the letter:

“Measure: increase flexibility of working schedules: increase the number of maximum workdays to six days per week for all sectors. (..) Set the minimum daily rest to 11 hours, delink the working hours of employees from the opening hours of the establishment, eliminate restrictions on minimum/ maximum time between morning and afternoon shifts…”

“Minimum daily rest of 11 hours” means a 13-hour workday. A 6-day work week with 13-hour days is not meaningfully different from the dark age of capitalism in the 1830s.

“A 6-day work week with 13-hour days is not meaningfully different from the dark age of capitalism in the 1830s.”

Actually, a 6-day work week with 13-hour days is not meaningfully different from the days of pre-industrial manorial economies such as those which existed throughout Europe during the Dark Ages and continued to exist in some form or other in various places even after the Industrial Revolution. On manorial estates, people often rose and went to bed with the sun because farm work could only be performed effectively during the hours of daylight.

In fact, since harvest time would ordinarily be occurring in Europe at around this time of year, there would only be around 12 hours of daylight in which crops could be gathered…but the common people were expected to work six days a week with Sunday off for observation of the Sabbath (in obedience to the dictates of the church) while the nobility who owned the estates lived in comparative luxury and ease..

Pre-modern culture was not monolithic. Peasants and guildsmen, and their religious allies, had developed various “representative” reforms in the 500 years prior to 1492 (Leonard Liggio). Ironically, the IR, and earlier nascent elements of modernism, fueled imperial expansion, centralization and absolutism. (while also creating the conditions for disruption that led to an eventual triumph of “democracy”.)

So, to vastly oversimplify, there were, and are, two “tracks” in western development, not just the one that you are advocating for.

Various interpretations of the meaning of the picture have been offered: the conflict between youth and old age, time as the devourer of all things, the wrath of God and an allegory of the situation in Spain, where the fatherland consumed its own children in wars and revolution.